The discovery that diversification lowers risk without lowering expected reward has prompted many pension funds to look to alternative asset classes to improve their funding. But how many should they add?

That depends very much on what risks matter most to the investor, according to research from Cass Business School. A portfolio combining eight alternative asset classes is 40 per cent less risky than a single asset class, researchers Andrew Clare and Nick Motson discovered. This is risk measured by how variable the returns are likely to be each year. Adding more does not improve matters hugely: a 12-asset portfolio is just four percentage points less risky.